Q1 2024 Agree Realty Corp Earnings Call
Good morning, and welcome to the agree Realty first quarter 2024 conference call all participants will be in listen only mode.
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I would now let's turn the conference over to Brian Hawthorne of corporate Finance. Please go ahead Brian.
Thank you good morning, everyone and thank you for joining us for acreage Realty's first quarter 2024 earnings call before turning the call over to Joanne Peter to discuss our results for the quarter. Let me first run through the cautionary language. Please note that during this call we will make certain statements that may be considered.
Forward looking under federal Securities law, including statements related to our 2020 for guidance.
Actual results may differ significantly from the matters discussed in any forward looking statements for a number of reasons.
Please see yesterday's earnings release, and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core <unk> adjusted funds from operations or <unk>.
So and that's that's a recurring EBITDA reconciliations of our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release website and SEC filings I'll now turn the call over to Joey.
Thanks, Brian and thank you all for joining us this morning.
We mentioned on our last call that we remain nimble and opportunistic ensuring we are well positioned to capitalize on opportunities as we uncover than.
I am pleased to report that is precisely what we have done so far this year. Our organization is focused on every day.
While the net lease transaction market continues to sort itself out our team is doing a tremendous job leveraging our relationships and uncovering unique opportunities.
The little competition in the marketplace and are also the first time last call when a seller is prepared to transact.
So first quarter acquisition volume was like we've seen an acceleration in the second quarter, while achieving similar yields and continuing to focus on best in class retailers across the country.
This is being driven by the sheer effort of our team our proprietary data environment and the depth of our industry wide relationships.
Year to date, our origination team has made an average of approximately 420 outbound calls weekly to contacts within our vast database to mind for opportunities, which is up 20% year over year or.
Our conversion rate of deals approved by our investment committee to letters of intent signed is the highest in over two years at approximately 38%.
Simultaneously, we have ramped up our efforts to leverage our tenant relationships exemplify how we create proprietary deal flow and accretive off market opportunities.
We continue to work hand in hand, with the country's leading operators to drive efficiencies and reduce operating expenses.
Our portfolio remains extremely well positioned with approximately 69% of rents derived from investment grade retailers, a weighted average lease maturity of over eight years and minimal lease term maturities.
Similarly, our balance sheet is in excellent shape with total liquidity of over $920 million or $385 million of hedged capital and no material debt maturities until 2028.
This quarter marks the first time that we've introduced formal ASM vote per share guidance we.
We believe it is important to demonstrate to shareholders that regardless of the environment. We can provide material earnings growth, while adhering to our time tested strategy.
Our enhanced origination efforts combined with our best in class portfolio and fortress balance sheet give us confidence that we can achieve <unk> per share between $4 10, and $4 13 for the year.
This reflects four 2% year over year growth at the midpoint, demonstrating our ability to provide consistent and reliable long term earnings growth through different economic environments.
We have conviction that we will be able to continue to deploy capital consistent with the spreads we've articulated and achieved year to date at this time, we have visibility into over half of the approximately $600 million acquisition guide.
With anticipated full year disposition activity of $50 million to $100 million roughly $237 million outstanding forward equity and free cash flow approaching 100 million on an annualized basis, we will be able to fund this activity in a largely net leverage neutral basis, ending the year well within our targeted leverage range.
Turning to our three external growth platforms. During the first quarter, we invested $140 million 50 high quality retail net lease properties across all three platforms.
The efforts are highlighted earlier enabled us to push cap rates significantly higher during the quarter with a weighted average cap rate, reaching seven 7%.
This represents a 50 basis point increase quarter over quarter, and 100 basis point increase year over year.
Investment grade retailers accounted for 64% of annualized base rents acquired or.
Our focus remains on achieving investment spreads at least 100 basis points and the best risk adjusted opportunities and not simply aggregating volume.
During the quarter. We also commenced for development and DSP projects with total anticipated costs of approximately $18 million in total with 20 projects completed or under construction during the quarter with anticipated total cost of approximately $82 million inclusive.
Inclusive of the $48 million of costs incurred through March 31.
We mentioned the potential for more opportunistic dispositions on our last call and that has come to fruition with six properties sold for gross proceeds of over $22 million during the quarter.
The weighted average cap rate for the dispositions was approximately six 2% and less than a third of the rents were derived from investment grade retailers.
We will continue to sell assets at attractive yields and reinvest that capital at approximately 150 basis points spreads included.
Included in these sales were a select set of assets, including a Mister Carwash and Gerber collision, Florida, which continues to see elevated 10 31 activity relative to the overall market.
On the asset management front, we executed new leases extensions or options on approximately 405000 square feet of gross leasable area during the quarter.
Notable extensions or options included a best buy in Danvers, Massachusetts, a hobby lobby in Port Arthur, Texas, and a Walmart Supercenter and main Arkansas.
Two leases were executed with new tenants during the quarter, our former Rite aid in North Cape made New Jersey was leased at Fresenius medical care and a former big lots in Jackson, Mississippi will be home to an O'reilly auto parts hub store.
We achieved favorable re leasing spreads averaging 111% for both locations and are also the beneficiary of significant credit upgrades with long term leases containing considerable escalations a.
Our remaining lease expirations for the year are de Minimis with only 12 leases or 40 basis points of annualized base rents maturing.
Additionally, we are very pleased with the progress and the only former remaining bed Bath <unk> beyond the three that were in our portfolio.
Intend to demolish the existing box and are currently negotiating leases and finalizing letters of intent with multiple retailers to ground lease to be created pad sites.
I should have more detailed information to share next quarter I will say that we anticipate a very significant lift relative to the former bed Bath <unk> beyond rent, which I believe will further highlight our our real estate underwriting.
Given the questions that we received I wanted to address the recently announced dollar tree and family dollar store closures.
Based on our current discussions with dollar tree, they will not be closing any of our stores that have less than three years of lease term.
They do plan to close of a weighted average lease term of seven five years, and which <unk> will continue to pay all rent and nets and represent only 30 basis points of our total portfolio of base rent.
<unk> already received interest from several of our retail partners to backfill half of the locations that are closing.
Lastly, with a best in class team and our proprietary technology platform, we see significant opportunity to continue to drive earnings growth.
Our model is built for all markets, we are uncovering opportunities across all three platform and are pleased that we can deliver <unk> per share growth over 4% at the midpoint combined.
Combined with a growing dividend yields over 5% the country's leading retail portfolio and our fortress balance sheet. We believe we offer a very compelling value proposition in the current environment.
With that I'll hand, the call over to Peter and then we can open up for questions.
Thank you Joey starting with earnings core <unk> for the first quarter was $1 <unk> per share representing a three 5% year over year increase.
<unk> per share for the first quarter increased four 6% year over year to $1 three.
We received approximately $1 $4 million of percentage rent during the quarter, which contributed more than a penny of earnings to core <unk> and <unk> per share respectively tenants.
Tenants typically pay percentage rent during the first quarter of each year.
As Joey mentioned, we've introduced <unk> <unk> per share guidance for full year 2024 of $4 10 to $4 13 Rep.
Representing four 2% growth at the midpoint.
We provide guidance on several other inputs in our earnings release, including acquisition and disposition volume general and administrative expenses non reimbursable real estate expenses and income and other tax expenses.
Our guidance further demonstrates our ability to drive consistent earnings growth, which supports a growing and well covered dividend.
During the first quarter, we declared monthly cash dividends of $24 seven per common share for each of January February and March on an annualized basis. The monthly dividends represent a two 9% increase over the annualized dividend from the first quarter of 2023.
Our dividend is very well covered with a payout ratio of 72% of <unk> <unk> per share for the first quarter.
Subsequent to quarter end, we announced a monthly cash dividend of <unk> 25 per common share for April the monthly dividend equates to an annualized dividend of $3 per share and also represents a two 9% year over year increase.
Moving to the balance sheet, we remain in excellent position with over $920 million of total liquidity at quarter end, including roughly $237 million of outstanding forward equity $670 million of availability on the revolver and more than $15 million of cash on hand, we.
We have also entered into a $150 million of forward starting swaps effectively fixing the base rate for contemplated 10 year unsecured debt issuance at just under 4%.
Combined with our outstanding forward equity this provides us with over $385 million of hedged capital to fund this year's investment activity.
Our revolving credit facility and term loan also have accordion options, allowing us to request additional lender commitments of 750 and $150 million respectively.
Further bolstering our liquidity position is free cash flow after the dividend approaching $100 million on an annualized basis and $50 million to $100 million of anticipated disposition proceeds.
As of the end of the quarter pro forma for the settlement of our outstanding forward equity net debt to recurring EBITDA was approximately four three times, which is flat quarter over quarter.
Excluding the impact of unsettled forward equity our net debt to recurring EBITDA was four eight times, our total debt to enterprise value was approximately 30%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend is very healthy at four nine times and with that I'd like to turn the call back over to Joey.
Thank you Peter at this time, operator, we'll open it up for questions.
Thank you, ladies and gentlemen, as a reminder, if you have a question. Please press star one.
First question comes from RJ Milligan.
Please go ahead.
Hey, good morning, guys.
Joe I just wanted to start off with.
The newly issued <unk> per share guidance, obviously, a long history of not providing it I'm just curious what the catalyst was to provide it now.
Joe: Hey, good morning, RJ I think.
A couple of things.
Speaker Change: First just given the most.
Probably the uncertainty in the macro environment, we are in a pretty pretty crazy World I think.
We're boring net lease REIT and that by definition should provide for clarity and certainty of execution and I think this guidance solidifies solidifies that in this macro environment.
I don't recall, a net lease REIT ever performing well with uncertainty surrounding it.
Speaker Change: And then second I think our investor deck, the third phase is consistency.
We wanted to once again reinforce that we will be a consistent growth rate here with a defensive portfolio, obviously and a fortress balance sheet.
And then lastly, I'd say this the confidence in the team here to recalibrate to the new World order that everybody is it this isn't easy going from a world of free money to today, and so frankly, most of them or none of the seriousness from that perspective, obviously, the last time being the GMC. So as a leadership team we needed to re.
Speaker Change: Internally our theme for the year is dialed in and cascaded down to the entire team. So my hats off to the to the leadership team.
Also thank you to the lineage team, which had been in a row in our operating strategy and our operating execution.
Everyone here is now embracing the new normal we talked about it on the last call and were working our tails off here and we're not we're not in this game just to play it and it's a win it and so given those factors I think providing this level of clarity to the street is just is historically consistent with our performance.
Makes sense, thank you for that.
You mentioned that you have visibility on about half of the total acquisition volume guidance for the year can you just talk about where those cap rates are falling.
Speaker Change: Right in line to effectively in line with Q1.
That is Q2, we're just wrapping up sourcing for Q2, probably in the next few days here.
So right in line, plus or minus 10 basis points subject to timing of closings or something we can into Q3 are falling out.
But right in line here, we're going to we're going to hold to that strict mandate of a 100 basis point plus spreads.
Without going up the risk curve here.
And have you noticed any changes in terms of the pipeline just given the move that we have the recent move that we've seen in interest rates.
The most recent move I assume.
I'll tell you actually.
Any changes in our pipeline as I mentioned in the prepared remarks, there are a function of the hard work. It's this isn't market based transactions and so with 400, plus outbound that we track through arc with conversion rates that are higher we are extremely focused on those sellers that have a strong desire or need to transact and so we'll continue.
To attempt to push cap rates higher here.
We'll look for those unique or asymmetrical opportunities, where we have insight or knowledge that can bring value create value and bring value to the table.
But again, it's hard to see what cap rates will do from here with the volatility of the tenure.
And just one follow up Joey I think in your prepared remarks, you mentioned about 110% on some re leasing I'm. Just curious if you could clarify instead of 110% recovery or is it a 110% positive rent spreads.
That 110% recovery.
Though the Fresenius and <unk>.
Go ahead sorry.
Obviously, you say, so rents are 10% higher than the previous type.
Correct, the <unk>, New Jersey, which to which took the form of Rite aid and then the former big lots will be the O'reilly hub. So I think most importantly.
As important as we're getting fit new 15 year base terms here with significant escalations with obviously vastly superior operators as well.
Thank you so much.
Thanks RJ.
Thank you next question comes from Nick Joseph from Citigroup. Please go ahead.
Thanks.
Hey, just wanted to go over what is really driving the 50 basis points sequential increase in cap rates from first quarter to fourth quarter, obviously that was a pretty big jumps. So just wanted to.
I understand that there is any change in tenant credit there. The makeup of deal relative to what you saw in the fourth quarter.
No very similar composition and we're still we're operating within the context of our sandbox as we've defined it obviously volume was down for Q1, I talked about the acceleration coming for Q2.
But we arent stretching the box here and we're going to remain that we're going to remain disciplined we're not going to go up the risk curve, we're not loading up on dollar stores and pharmacies that check the proverbial IGD box.
And so the composition is very similar to what <unk> seen historically.
Frankly, frankly, no new names.
Thanks, and then.
More into a normalized range.
It's a great question. There is no direct correlation I think it's fair to say there is causation there but.
But what we see in the net lease and all stabilized real estate asset classes without a need to sell I mean, the supply is all the way all the way down to the single family residential market without the need to sell.
There just really isn't the impetus for owners to transact and so again, our focus around with Peter offered references refers to as the three DS situations, where there is death divorce divorce and debt maturity here or shorter term opportunities that we're working hand in glove with retailers to extend HIFU.
Forming opportunities or just solid underlying fundamental real estate, where we know theres, a mark to market opportunity embedded in it so.
I would tell you it will be interesting to see how cap rates I think where it is.
I would hope.
We will see more of those more of those types of instances here.
But a lot of it is driven frankly by sellers hesitancy to transact in a market when they were hoping for a March cut now they are opening for a June cutter September cut and sew.
Theres, obviously merck into as to the overall environment from a seller's perspective at least.
Thank you very much.
Thanks, Nick.
Thank you next question comes from Ronald Camden from Morgan Stanley. Please go ahead.
Hey, two quick ones just on starting with the guidance just what are you guys thinking in terms of bad debt, what's baked into that number and how does that compare to historical.
Yes. So Ron this is Peter last year, when we came out with the do nothing scenario of over 3% <unk> per share growth, we talked about embedded in that in that scenario about 50 basis points of credit loss, which at the time, we framed as a conservative assumption I think that is still a conservative assumption today and this guidance range contemplates.
Particularly with visibility here.
Through April we view 50 basis points as a conservative level and our guidance range today.
Great and then just my second quick one on the acquisitions.
I think you talked about the cap rates, but can you talk about sort of sale leaseback activity in the ground lease market, how are things sort of reacting on a cap rate basis with that with the recent interest rate move.
Sale leasebacks, most tenants unless they need the money are very reticent to enter into this sale leaseback. We've got a couple of discrete market today, given the rising rates.
We've had a couple of discussions in the last week with tenants that are in a holding pattern. We're working on a potential a couple of opportunities in Q2, we'll see if those materialize, but I think sale leaseback activity outside of private equity sponsors here I was going to be fairly muted until we get some stability in base rates.
And then most of these are Iga issuers rated so they're comparing where they can issue in the unsecured market to the sale leaseback market I think most importantly, we are not going to transact with any we're not gonna transact with any tenant that need our capital and so I think they are being patient and we're being patient, but there are a couple of opportunities out there that we're looking at.
And the ground lease market.
It's essentially the same sourcing methodologies are the same ownership pool of the same seller pool as the traditional net lease market I would note that this quarter.
Our second largest acquisition was a ground leased to home depot in Joliet, Illinois, <unk>, everyone can go take a look at it through the dominant Rico retail corridor, where 700 feet of frontage only has about four years remaining.
Lease term paying approximately $600000 in rent.
So to the questions out there that may be forthcoming at Brady was wondering if were going up the risk curve in terms of wall weighted average lease term just look at the underlying real estate on your own Google maps.
A high performing store with significant fronted subsidized by a Dunkin' donuts sublease on one outlet. So we're finding those opportunities and the ground lease space, but.
It's the same sourcing methodology and they've got to make sense for us in the confines of our underwriting.
Great. Thanks for the guidance that's it for me.
Thanks, Ron.
Thank you next question comes from Kai Pan Kim Centurylink. Please go ahead Sir.
Okay.
Thanks, Good morning Joey.
Just going back to your guidance.
Gauge how much conservatism is built into the midpoint basically you kind of see how fast you have to run to.
To achieve it.
Given that it's your first time measuring it and I think we're just trying to get a sense of.
Your philosophical approach to it.
Well I think I think our guidance is realistic it's something that we are up we are obviously confident that we're going to be able to achieve as the year plays out but it will hopefully have the opportunity to.
To narrow that guidance into beauty, even more visibility.
Peter anything you would add there.
I would just add in April obviously, we have some visibility into the year just in terms of timing of when we're introducing guidance. It's a relatively tight range from $4 10 to $4 13, and I think that speaks to the confidence we haven't hit in that range.
Okay, and I guess whats changed over the past couple of months last quarter, you were talking about.
Maybe I don't want put words in your mouth, but more of a comp pencils down approach that there was.
And clarity in the market and maybe the deal flow wasn't there, but whats basically changed in the past quarter.
Okay.
Yes.
Speaker Change: We are going back to the fourth quarter.
We saw the 10 year Treasury go from four to five down to $3 85 in a combined 80 days or so plus or minus.
And we've had some stability obviously the 10 year has been on our March upwards. Since then we've had some stability.
I think I think more important to that again.
I'll reiterate.
The team here led by the leadership team has recalibrated. Our approach we are not wasting time on sellers that are in 2022 still we are focused on the opportunities that are readily available to transact with real sellers.
And that in conjunction with ramping our outbound efforts rolling our sleeves up and leveraging our tenant relationships, which are very deep.
It gives us proprietary access to deal flow.
So we're creating opportunities I referenced manufacturing transactions on the last call I apologize if that was taken in correctly when I referred I referenced the manufacturing transactions, finding short term opportunities and doing early extensions finding high performing stores and working with retailers working with retailers to reduce.
Their accuracy cost on stores are the landlords that are no longer.
Speaker Change: Fit within their fit within their profile or framework and so it's.
It's a value creation exercise, but this is this is hand to hand combat. This isn't wholesale buying like most people were accustomed to with 12 years of declining interest rates and cap rates and so the team has done a tremendous job refocusing recalibrating and a wholly different environment.
Speaker Change: Okay. Thank you.
Thanks, Steve.
Speaker Change: Thank you next question comes from Joshua <unk> from Bank of America. Please go ahead.
Hi, This is farrell granted on behalf of Josh.
I just wanted to touch on I know last quarter there was comments.
And the most attractive.
And that's been vertical.
In terms of investments Brad. Please proceed.
<unk> development.
Or do you have any other commentary that mark.
Our development and DSP platform remain active.
The.
The standard mode of the majority of retailers of growth through merchant developers is broken today and so we continue to have those conversations with both the developers as well as the retailers on how we can step in and create value as I mentioned last quarter here we can.
B a solution, but that solution has duration risk whether it's a four month project or an 18 month project and we're going to we're going to price in that duration risk and so we continue to have those conversations will be on the road actually with a couple a couple of retailers headquarters in the next few weeks here to see how we can how we can continue to be a solution.
In a world where elevated construction costs lower loan to values higher interest rates and unknown cap rates. Upon completion, frankly, just inhibited our merchant builders ability to perform.
Great and.
Also when you were mentioning the increase in call volumes outbound is this a new internal initiatives.
Just going forward or.
Speaker Change: The shift.
So arc, obviously arc is instrumental and tracks all of our connections through conversion rates utilizing kpis across the across all functions really here at the company.
But we've made a concerted effort led by Craig or with our chief growth officer to ramp that call volume up to mine use our vast database embedded in arc to mind for opportunities out there that arent glossy brochures and.
And then in an auction environment.
So those are.
Speaker Change: We reiterate those opportunities are really going to come to fruition more so in Q2 here Q4 Q1 sourcing the majority of that was it was done during Q4 right. If we just use our standard 70 days to letter of intent to execution to close.
Got 20 days of sourcing in Q1.
Now Q2 is really post rollout of.
Incumbent upon after the new year here.
<unk> dialed into strategy and that's the theme here for the year, it's dialed in.
And we'll see that come to fruition in Q2 here.
Great. Thank you.
Thank you.
Thank you next question comes from Eric Gordon at BMO. Please go ahead.
Hey, good morning.
Just one on the disposition guidance I was hoping that you could talk about some of the opportunistic capital recycling.
Program that you have going on.
Eric Gordon: What are the different tenant types or geographies that you're looking to prune from our portfolio.
Yeah as I mentioned in the prepared remarks.
There seems to be a disproportionate amount of activity, albeit at a low base of $2 31 activity specifically in Florida.
Dispose of a gerber collision of Mister car wash I think you'll continue to see us dispose of and recycles of noncore assets Pri.
Primarily in Florida.
But also opportunities that are inbound with a 10 31 that needs to be filled quickly where we can opportunistically sell.
Asset and recycle that capital of 150 basis point spread so again, Florida seems to be the hotspot for a number of reasons.
So we're very confident in that range of 50 to 100, considering we've already closed over 'twenty and have visibility into over 2000 for Q2.
That's helpful and then I just.
What is the occupancy had a small dip sequentially I was just hoping you could provide some additional color on loans.
Tenant vacates and how should we be thinking about occupancy for the remainder of the year.
We were at 99, 8%.
<unk> had in Q4, which is up which is pretty high I mean, thats effectively occupied and argue $99. Six is effectively occupied it's truly the resolution of one box, which we anticipate in Q2.
We're going to have some interesting embedded real estate opportunities inclusive of the bed Bath <unk> beyond the redevelopment in Memphis, Tennessee.
In Q2, it looks here and I think it is going to demonstrate our underwriting prowess that our real estate prowess, but also our ability to identify transactions in assets within our portfolio I should say not transactions, but assets within our portfolio that have real estate fundamentals that arent being.
Frankly utilize to the highest and best purpose and so hopefully those are done and complete in Q2, and we can give obviously much more detailed breakdown.
Alright, thanks very much.
Thank you.
Thank you. Your next question comes from Rob Stevenson from Janney Montgomery. Please go ahead.
Hey, Good morning, guys. Joey can you talk a little bit about the expected return on the $74 million of development and DSP projects that were under construction at the end of the quarter and what was the similar sort of return to those projects you completed in 2003.
Yes, I don't recall that the 2023 returns off hand.
Again, it's really duration.
Obviously, theres real estate and credit, but duration becomes the critical aspect, if we're able to retrofit an existing building through either project and the tenant is going to be paying rent and 120 or 150 days, we do that after with Sunbelt rentals, we do that often with Gerber collision. We're looking I would say approximately 50.
Eric Gordon: 50 basis points spreads to where we can buy like kind assets now if we're talking about at entitlement process.
And our new build we're very frankly wide wide of that if it is going to be a 12 to 18 month project, we're not going to go out there on the duration curve without without a significant premium and so thats really the tension again, which we're trying to work through with retailers and merchant developers here.
The team is on the phone all day talking to developers with broken projects, where they can't get financing or the returns don't make sense.
They're unable to perform or frankly, just won't perform because they have don't have clarity.
Eric Gordon: Upon the backend and so there is a significant opportunity there the question becomes which ones hit the risk adjusted return threshold that we just talked about Rob, but you can assume that if were.
We're buying here in the mid upper Sevens.
Certainly not putting our financings shovels in the ground at those rates.
Okay, and then you talked a bit earlier about the.
Dollar trees and can you talk about how many excuse me.
Are likely to close or not likely to be dollar trees in the near future. Given your current discussions that you are getting.
Eric Gordon: Going to need to re tenant at some point and what's the average size of those boxes.
Yes, just so just just to reiterate we have no stores on the closing list that have less than three years of term.
That is obviously subject to dollar trees change there'll be.
There'll be responsible for all rent net there's corporate guarantees behind all of these leases ironically the weighted average lease term of approximately 15 stores that will be closed is approaching eight years 758 years. So they are on the hook there and then we've had inbounds for for over half.
We're going to start discussions obviously, they've got a lot of going through.
<unk> right now on whether theyre going to sublease or whether we will want to pay a termination fee here and then we will enter into direct leases, but you can imagine the retail partners inclusive of other dollar stores auto parts operators low price point operators that are looking at those opportunities, but I think we're very pleased.
We're very pleased that.
With the outcome given the store closure announcement there it will have nothing expiring within three years and again. These are averaged $100000 in rent per store with a weighted average lease term approaching eight years.
Okay, and then last one for me.
Can you talk a little bit about the market out there for vacant sites given the financing environment.
So if there is like your vacant bed bath beyond or whether or not there's movie theaters et cetera are there people out there actively buying these for redevelopment play at this point or is the financing not allowing them to do that is that an opportunity for you guys to use capital on some of the <unk>.
Eric Gordon: Better located vague.
Bake at retailers to do stuff like Youre doing with the bed Bath site than you've done historically with a number of other stuff dating back to the Kmart days.
Oh, the Kmart dates.
It's a broad question first.
The lack of financing given the regional bank credit Crunch here has made development a very difficult proposition with loan to cost is 60% to 65% as opposed to getting 90% to 95%. That's one plus obviously the elevated interest rates to the movie theaters. Those are tear it out right. If you are a movie theater owners.
Eric Gordon: Here there is too many screens in this country that those are teardowns and Redevelopments, that's not really within our sandbox.
The bed Bath <unk> beyond an opportunity I think well first there is an insatiable appetite for highly well located boxes that are marketable size. So if you have a 20 to 25000 square foot junior box the replacement cost on vertical alone is $160 per square foot and so those.
<unk> don't pencil to build and so what we see is significant interest in any existing boxes that are well located from a whole host of tenants I mean, 90% of the tenants in our portfolio are looking to grow today is just the cost structures in.
And the ability to execute that growth.
The bed Bath <unk> beyond the case.
And I'll give a little bit more detail on it is fairly unique it's out in front of a mall in Memphis.
Tennessee is perpendicular to the road and is it maximizing the frontage we've written white papers about this in the migration to freestanding formats is driving.
Really an insatiable demand for pad sites from C store users from <unk>.
<unk> users are chicken sellers chicken restaurant chicken based restaurants I'll call them.
So a lot of chicken going around.
Car wash is we all know.
So these freestanding operators are continuing to grow and grow and grow we looked at the 45000 square foot bed Bath <unk> beyond box and I'll be honest the 45000 square foot box today is isn't very remarkable there arent. Many users for 45000 feet. We had an offer to take the box in the mid single digits.
From a user and then we looked at integrated second the highest and best use here is to take the box down and.
And create freestanding pad sites, allowing a major retail corridor. It will be by first redevelopment of a freestanding box, which includes a total tear down and conversion to pad sites in my career.
And we're going to have a significant very significant lift here upon completion of that redevelopment and we think there are other opportunities in the portfolio in both outside the portfolio to continue to really take advantage of the migration and the really the expansion of the freestanding operators.
Okay.
Thanks, I appreciate the time.
Thanks, Rob.
Thank you. The next question comes from Alex Zukin from Baird. Please go ahead.
Alex Zukin: Hey, good morning. Thank you for taking my questions. First one is what are the plans to issue debt and is there anything.
The sort of assumed in guidance.
Thanks, Alex. This is this is Peter I think first just in terms of our funding plans for the year as we said in the prepared remarks, we can execute on that $600 million acquisition guide on a leverage neutral basis without needing to raise any external capital and so we're in a great position for the remainder of the year, we have plenty of flexibility.
In terms of how and when we access the capital markets in terms of debt funding plans for the year again, we can be flexible we do have a $150 million of forward starting swaps in place, which have hedged the future 10 year unsecured debt issuance effective base rate of just under 4%.
We will look to be opportunistic in terms of accessing the debt markets, but we have over a year to use those swaps.
We can afford to be nimble and flexible in terms of how and when we come to the market.
Yes.
Okay helpful. Thank you.
Alex Zukin: One for me is kind of on the pipeline of potential developer Takeouts.
Is that are those conversations increasing or decreasing I know Joe you talked about this merchant developer of retailer kind of buying right now.
But just curious if those conversations have been increasing.
Increasing.
We built out that team, we've launched arc module for that team we've added to that team in terms of.
Team members.
They are increasing their <unk>.
That can work and so it's really just sifting through the returns that work for.
For the retail for that for the developer into a retailer the rents per square foot through the output and figuring out.
The duration premium or <unk> term.
Or credit premium that we're going to require relative to where our standard acquisition.
Got it.
Speaker Change: One last one for me.
Is the company, having any direct conversations with retailers about expansion so not for the developers, but directly I know you mentioned you're about to go away.
With some retailers, but any more color on that.
Yes, very very frequently.
Whether it's coming in in stepping in as a solution.
We're working with retailers on a standard rollout those are those that's a big focus for us.
Along with the FDA.
Got it Thats it for me thank you.
Thank you.
Speaker Change: Thank you. The next question comes from Linda Tsai from Jefferies. Please go ahead.
Hi, Good morning, I know your confidence about the $600 million in acquisitions this year, but what does the low and high end of eight <unk> per share guidance Bacon for acquisition volume.
So the acquisition or sorry, the <unk> per share guidance range assumes approximately $600 million of acquisitions, when I think about hitting the low end or the high end of that <unk> <unk> per share guidance range I would look to the other inputs that we guided to in the earnings release and obviously.
The more favorable end of those ranges will result in us being closer to the high end of our <unk> per share guide range at the less favorable end of those ranges would be closer to the low end, but in terms of acquisition volume, we are assuming approximately $600 million.
Thanks, that's helpful and a five 7% to 6% of G&A I know, it's a little early but would this be a reasonable run rate to assume as we look out to next year.
Well I think I think first we've continued to scale. So the G&A as a percentage of revenues has continued to scale I would assume next year Youll see that continued scale as well obviously, that's subject to revenue, which is driven by by investment volumes, but this company has become much more efficient from a <unk>.
Knowledge standpoint.
From a process standpoint, and so youll see that number continue to scale that denominator. There I think will be the biggest moving piece the revenue number a bigger yes, that's correct and Linda just for some some more context. If you look back four years ago G&A as a percent of revenue was roughly 8% and so we've seen based on our guide this year roughly 200.
<unk> points of scale just in the last four years and expect that we'll continue to see scale here going forward.
Thanks for that and then sticking family dollar boxes.
What's the IRR Youll expect on those.
Speaker Change: As you heard honestly, we don't.
We haven't.
We haven't got that far yet there is no resolution, we feel that as I mentioned.
Inquiries for over half of them already.
The base case is that dollar tree is on the hook for the weighted average lease term of almost eight years for the rent nets on all of them, but we haven't looked at disposition, yet or whether theyre going to dollar tree will be sub leasing themselves or we would take a termination fee and enter into a direct lease.
With a net new tenant. So this is all pretty fresh hot off the press.
Speaker Change: But we'll be working through that.
I would think this quarter.
Thank you one last question you emphasized Florida, a couple of times why is now the right time to sell their assets.
Perfect.
State specific it just seems that a disproportionate amount of $10 31 activity, which is very muted as we all know is attracted to the Sunshine State, Florida seems to be the new California International capital, It's private capital.
The stories frankly of the buyer profile don't even really add up but if they come to the closing table.
Speaker Change: We're happy with it I mean, we had a buyer walk away.
On our sales the first time in my career from a $75000 nonrefundable deposit at the day before closing on a couple of million dollar sale in Florida as well so it's very interesting.
But we will again continue to look to opportunistically dispose of assets at these cap rates.
And then recycle it but Florida seems to be an outlier here of $2 31 activity now.
You mentioned it is fractional 10 31 overall activity is fractional what it's been in past years and so.
This is opportunistic they don't all close their open vessel passing when will terminate.
But we're working prudently through it and we've built out the disposition team.
Under.
Under Nicole.
And we're actively pursuing it.
Thanks for the color.
Thanks Linda.
Thank you and the next question comes from.
Jesse at Mizuho. Please go ahead.
Hey, there thanks for taking my question.
Jimmy can you talk a little bit about the economics behind back filling for the big lots I think it was filled with an o'reilly.
Maybe some color on the capital that was required.
The new lease term the re leasing spreads and I know Linda just ask the question about dollar stores, but I'm just curious how different are the in place rent in box size of the big lots versus the dollar stores and anything else that could be relevant more informative there. Thanks.
Yes, the only only thing I can share with you again, when we put the two leases 110% to 111% of former Reds.
<unk>.
Both leases both the big lots, sorry, the O'reilly as well as.
The Fresenius are long term leases with escalators, we're seeing tenants more amenable to escalators, obviously, given the inflationary environment I think there is a misnomer that.
Investment grade operators are flat leases that is patently false.
With these leases would prove that wrong de minimis landlord work.
Again, this is going to be a hub store and so we have a few other hub stores, but these are the distribution as well for other commercial locations.
And body shops, as well as a retail storefront. So we're excited to add that obviously a significant a significant upgrade.
That box, if I recall was probably 30000 feet.
So it was a larger box the dollar stores range from about 8% to 10000 feet generally and so there are smaller boxes.
Then the big lots.
And so the marketability of them is very different I would just say from the prospective tenant pool than junior box such as the former big lots.
That's helpful. I appreciate it.
And I wanted to go back quickly on the commentary earlier on I think you're saying you're expecting less activity on the sale leaseback side.
I would have thought that with debt costs still fairly high here that a lot of these guys don't have better alternatives.
Sale leaseback, so maybe some more color on what you're hearing or seeing on that front would be helpful. Thank you.
Well, Jeremy we're talking to sophisticated operators as potential counterparties and former Counterparties on sale leasebacks most of them have.
Extremely strong balance sheets rated <unk>.
Triple B your higher they are industry leaders.
For them to go into into a sale leaseback.
On a spread over where they can issue today, just doesn't make economic sense and they have the balance sheet and liquidity profile to hope for lower rates.
It's that simple and so I think all of them, knowing where cap rates would trade today are holding out for better for honestly better better pricing.
So a number of the retailers, we transacted with last year on the sale leaseback front, we've had discussions with them and want to continue they've publicly commented on their earnings calls about sale leaseback activity, but in reality I'm not sure. They are ready to stomach the pricing that is really going to clear in today's market.
And so it's.
It's a game of wait and see some are getting full on their balance sheet and looking for solutions, others are saying, Hey, we will hold for the long term unless something unless the wind changed so.
Again, the tenants that we're doing sale leasebacks with don't need the money. That's the most important thing we are a small piece of their overall capital stack and so it's almost a secondary exercise and towards in terms of Capex. It is a secondary exercise in terms of capital sourcing farm, if its not favorable theyre not going to do anything.
Helpful. Thank you.
Thanks, Adam.
Thank you we have no further questions I will turn the call back over for closing comments.
Well. Thank you everybody for joining us. This morning, we appreciate everyone's time and look forward to seeing you.
The upcoming conferences I appreciate it thank you.
Okay.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.